In a debt management plan? No new credit for you

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

Dear Opening Credits,I need a Visa card with no more than a $41,500 credit limit, to be used exclusively for business travel. My wife and I are two years into a four-year consumer credit counseling plan. We have never missed a monthly $1,300 payment. I just purchased a vehicle at 4.99 percent, 100 percent financing through Wells Fargo and have approximately a 680 credit score. My question is that I keep getting denied for a credit card. I assume that is due to the counseling plan. Do I have any options? I'd prefer a Visa card as that seems to be more widely accepted. -- Mike

Dear Mike,
Go fetch the agreement that you signed when you enrolled in the credit counseling agency's debt management plan (DMP).

Got it? Great. Now read it carefully. Almost all of the organizations that set up DMPs stipulate that clients are required to close the cards on the plan -- though they can sometimes leave one open -- and pledge that they won't apply for any new accounts while on it.

Credit counseling agencies aren't trying to be controlling for fun. These rules have been established because the very purpose of the debt management plan is to help people get out of debt in a maximum time frame of five years. Avoiding new loans and lines of credit is integral to success. More, the creditors that give participants interest rate breaks do so only because they've made the promise to work their way out from under those heavy balances.

It looks like you might have already reneged on the agreement by getting a car loan. Now you want a credit card with a high charging limit, and you're wondering why you're being turned down? I don't believe it's because you're paying through the agency. I think the credit card companies have concluded you can't handle more debt.

Not only do you still have halfway to go on the debt management plan -- meaning you still have substantial balances left on the old cards and accounts -- but the new loan has put you even further behind. Your income may be tapped out by having to pay all of your current obligations.

As for how paying creditors through a third party is perceived by new lenders, it depends on their perspective. They may find it positive, negative or neutral. However, while debt management plans are not factored into a credit score, since you've never made a late payment to those you owe while on the plan, it may actually be helping to bring those numbers up.

I understand that you may need to travel for business, so if you did leave one of the cards off your plan, use it for such expenses. If you didn't, I suggest you pay with your bank's debit card to pull cash directly from your checking account. There are downsides to this option. Debit cards don't offer the same level of consumer protections as credit cards and most don't come with rewards programs. Also, if you use it to book a hotel or rent a car, some funds might be blocked, which can cause a cash squeeze. Then again, paying with cash only is a guaranteed way to stay out of debt.

After you repay your liabilities on the debt management plan, go ahead and card-shop. Before you do, though, pull your credit reports to make sure the balances are at zero, and check your credit scores to know where you stand so you know what type of credit account you likely qualify for -- then apply prudently.

Oh, and while Visa is a larger company than MasterCard, credit cards that carry either of these logos are equally and widely accepted.

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Published: September 7, 2011

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